94. Profit-sharing plan — 0325 Publ 6088 (PDF)

Statement of Requirement: Reg. § 1.401(a)(4)-8(b); Rev. Proc. 2023-37, 2023- 51 I.R.B. 1491, sec. 12.02

Sample Plan Language:

As elected by the employer in the adoption agreement, the employer will determine the total amount of contributions for each plan year and either (1) allocate such total amount to participant groups (the “Participant Group Allocation Method”), or (2) allocate such total amount using age weighted allocation rates (the “Age Weighted Allocation Method”). Employer contributions will be allocated to each eligible employee.

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Participant Group Allocation Method. If the employer has elected the Participant Group Allocation Method in the adoption agreement, then, for purposes of determining the amount of employer contributions to be allocated to employees’ accounts, each eligible employee of the employer will be included in a participant allocation group, as provided in the adoption agreement.

The employer will specify in written instructions to the plan administrator or trustee, by no later than the due date of the employer’s tax return for the year to which the employer’s contribution relates, the portion of such contribution to be allocated to each participant allocation group. The employer contributions allocated to each participant allocation group will be allocated among the employees in that group in the ratio that each employee’s compensation, as defined in section _____ of the plan, bears to the total compensation of all employees in the group. In the event that an eligible employee is included in more than one participant allocation group, the participant’s share of the employer contribution allocated to each such group will be based on the participant’s compensation for the part of the year the participant was in the group.

(Note to reviewer: The blank should be filled in with the plan section number that corresponds to Option B in the Sample Adoption Agreement language in LRM #31.)

Age Weighted Allocation Method. If the Age Weighted Allocation Method is elected in the adoption agreement, the total employer contribution will be allocated to each eligible employee such that the equivalent benefit accrual rate for each participant is identical. The equivalent benefit accrual rate is the annual annuity commencing at the participant’s testing age, expressed as a percentage of the participant’s compensation as defined in section _____ of the plan which is provided from the allocation of employer contributions and forfeitures for the plan year, using standardized actuarial assumptions that satisfy section1.401(a)(4)-12 of the Regulations. The employee’s testing age is the later of normal retirement age, or the employee’s current age.

(Note to reviewer: The blank should be filled in with the plan section number that corresponds to Option B in the Sample Adoption Agreement language in LRM #31.)

Minimum allocation gateway. Any allocation of contributions under either the Participant Group Allocation Method or the Age Weighted Allocation Method must satisfy the minimum allocation gateway:

Each benefiting NHCE must have an allocation rate that is not less than the lesser of 5%, or one-third of the allocation rate of the HCE with the highest allocation rate. An allocation rate is the amount of contributions allocated to an employee for a year, expressed as a percentage of compensation, as defined in section ______ of the plan.

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(Note to reviewer: The blank should be filled in with the plan section number that corresponds to Option B in the Sample Adoption Agreement language in LRM #31.)

(Note to reviewer: There are other gateways that may be used in order for a defined contribution plan to cross-test using equivalent benefits under Reg. § 1.401(a)(4)- 8(b). The plan may provide for a different gateway other than the minimum allocation gateway (for instance, the broadly available allocation rate requirement of Reg. § 1.401(a)(4)-8(b)(1)(iii) or the gradual age or service-based allocation rate requirement of Reg. § 1.401(a)(4)-8(b)(1)(iv)); however, sample language for other gateways is not provided herein. If a Provider wishes to use other gateways, it is important to ensure that the benefits provided under the plan remain definitely determinable. For plan benefits to remain definitely determinable, the plan document should specify which gateway is used. The plan document could allow adopting employers to elect between different gateways, but to provide definitely determinable benefits; it is not sufficient for the plan document merely to specify that one of the gateway requirements will be satisfied.)

(Note to reviewer: No § 401(a)(4) failsafe language is allowed in any Pre-approved Plan document. The plan must pass nondiscrimination testing operationally based on Regs. § 1.401(a)(4)-1 through § 1.401(a)(4)-13.)

Sample Adoption Agreement Language:

( ) Employer contributions will be allocated under the following method (select one)

A. ( ) Participant Group Allocation

Each eligible employee is assigned to a participant allocation group, as follows:

(DESCRIBE THE OBJECTIVE CRITERIA FOR DETERMINING THE MAKE-UP OF EACH PARTICIPANT ALLOCATION GROUP. CRITERIA MAY NOT BE SUBJECT TO EMPLOYER DISCRETION, WHICH WOULD CAUSE THE PLAN TO FAIL TO HAVE A DEFINITE ALLOCATION FORMULA.)

In the case of self-employed individuals (i.e., sole proprietorships or partnerships), the requirements of section 1.401(k)-1(a)(6) of the regulations continue to apply, and the allocation method, including the determination of participant allocation groups, should not be such that a cash or deferred election is created for a self-employed individual as a result of application of the allocation method.

The plan’s eligibility provisions, and participant allocation groups may not be structured to limit participation to only the shortest service and lowest paid NHCEs while excluding the other NHCEs.)

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B. ( ) Age Weighted Allocation

The following assumptions will be used to calculate the equivalent benefit accrual rate:

Pre-retirement Mortality __________

Post-retirement Mortality _________

Pre-retirement Interest ____________

Post-retirement Interest ___________

(Note to reviewer: Standard interest rate and standard mortality table assumptions in accordance with Reg. § 1.401(a)(4)-12 must be used when testing the plan for satisfaction of nondiscrimination requirements. A table of age-weighted factors (that comply with the previous sentence) may also be used.)